3 Financial-Infrastructure Stocks to Consider

Financial advice is becoming commoditized with the rise of “robo advisors” and automated investment portfolios, says one industry observer, but there are a number of “picks and shovels” that stand to be long-term winners.

JMP Securities analyst Devin Ryan, in a note published Monday, says the fee pressure that comes from commoditization is eroding profit margins for basic wealth-management services. Companies like
Charles Schwab
(ticker: SCHW) now offer financial planning with a certified financial planner on the phone for $30 a month—a much cheaper option than paying an asset-based fee. Many robo advisors provide asset allocation, security selection, and automated rebalancing for management fees of 0.20%.

Still, Ryan contends that there is plenty of demand for personalized advice delivered by a live human being. “We think that personalized financial advice is one area that is not a commodity, and therefore should be more resilient to fee compression over time,” he writes.

As evidence, he points to a boom in registered investment advisors: The number of RIAs grew sharply from 2010-2018, increasing to 36,852 from 19,681. Many RIAs have been striking out on their own, breaking away from the big Wall Street “wirehouse” brokerage firms and insurance broker-dealers.

Within the industry, some of the best opportunities may now be in the companies providing infrastructure to advisors: custodial and trading services, financial-planning software and tools, and portfolio management software. “The old adage that it is often better to sell the picks and shovels than mine for gold seems apropos,” Ryan writes.

The growth of independent RIAs is benefiting the major custodians of assets. Schwab, Fidelity,
TD Ameritrade
(AMTD), and Pershing (a division of
Bank of New York Mellon
(BNY)) now oversee roughly half the industry’s assets.

Devin writes that there should continue to be a “strong bull case” for these custodians. They’re benefiting from secular tailwinds within the asset-management industry (as market asset values increase and wealth transfers to a younger generation). And their scale should enable them to grab more market share from smaller custodians. The “subscale players cannot compete on product, service, or economics,” he writes.

How to invest? Schwab is the largest custodian of advisors with a 30% share. And the firm continues to bring in more advisors and assets. The challenge with the stock now, however, is that interest rates may continue to fall. Lower rates are pressuring Schwab’s net interest income, which accounts for more than half of its revenue.

Ryan has a Neutral, or Market Perform, rating on the stock, largely for that reason. The average price target for the stock among Wall Street analysts has fallen to $45.75 from about $59 a year ago, according to FactSet.

But some analysts recently turned positive on Schwab. Wolfe Research’s Steven Chubak upgraded the stock to Outperform on Sept. 3, writing “Don’t Chuck Baby Out with the Bathwater.” He believes the company should be able to recoup revenue from other areas as rates come down, implying more upside to the stock that consensus estimates now model in. He has a $46 price target on the stock. Shares closed Monday at $41.10.

Another way to play the infrastructure theme is with TD Ameritrade. “TD Ameritrade is ‘absolutely crushing it’ on sheer numbers of advisors,” Ryan wrote in a recent note. The firm is targeting advisors with relatively small books of business in the $40 million to $50 million range, and it’s “winning on its open architecture technology,” which holds appeal for both advisors and clients. Ryan has a Market Perform rating on the stock, however, reflecting valuation and net interest margin pressure (similar to Schwab).

TD Ameritrade closed Monday at $47.88, and has an average price target of $54.87, according to FactSet.

One stock Ryan does like is
Envestnet
(ENV), rating it Outperform. The firm provides “intelligent systems for the wealth management and financial wellness industries,” he writes. Ryan has a $72 price target on the stock. It closed Monday at $58.45 and is up nearly 20% for the year.

3 Financial-Infrastructure Stocks to Consider

Financial advice is becoming commoditized with the rise of “robo advisors” and automated investment portfolios, says one industry observer, but there are a number of “picks and shovels” that stand to be long-term winners.

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